Question

In: Accounting

A company purchased a patent on January 1, 2018, for $2,500,000. The patent's legal life is...

A company purchased a patent on January 1, 2018, for $2,500,000. The patent's legal life is 20 years but the company estimates that the patent's useful life will only be 5 years from the date of acquisition. On June 30, 2018, the company paid legal costs of $135,000 in successfully defending the patent in an infringement suit.

Prepare the journal entry to amortize the patent at year end on December 31, 2018. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Solutions

Expert Solution

A patent is to be amortised over it's legal life or useful life, whichever is life. In the above case, useful life of 5 years is lower than its legal life of 20 years, so the patent will be amortised over it's usefule life of 5 years.

Further, legal costs incurred in successfully defending the patent in an infringement suit are to be capitalised to patent costs. If the company is unsuccessful in defending the suit the costs would be charged to expense. Since the company successfully defended the lawsuit, hence legal costs would be capitalised and added to the cost of the patent.

Therefore , total amount to be amoritsed over 5 years = 2,500,000 + 135,000

= 2,635,000

Amount to be amortised every year = 2,635,000 / 5

= 527,000

Journal entry for amortisation will be as under:

Date Account Debit Credit
Dec 31, 2018 Amortization Expense        527,000
Accumulated Amortization        527,000
(To record amortisation of patent)

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